HSAs can help offset future health costs, but funding them is a struggle for some

Health Care Current | July 18, 2017

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

HSAs can help offset future health costs, but funding them is a struggle for some

By Sarah Thomas, managing director, Center for Health Solutions, Deloitte Services LP

A few months ago, one of my two adult children started her first job out of college, and I helped her pick a health insurance plan. As is the case with most large companies, she had several options – all of which had high deductibles. One option included a health savings account (HSA) into which her employer contributes $600 a year. The high deductible health plan (HDHP) with an HSA seemed to make good economic sense for her.

High deductible plans (with or without HSAs) are now the law of the land – a sentiment echoed by panelists at a July 12 briefing hosted by the Employee Benefit Research Institute (EBRI). Even Medicare Part A has a deductible high enough to qualify as an HSA-compatible plan if eligibility rules were changed. There were 20 million HSAs at the end of 2016, collectively holding about $37 billion in assets, according to Devenir Group LLC. That’s up from $1.7 billion in 2006. And Devenir estimates as many as 45 million account holders, spouses, and dependents might be covered by an HSA-qualified HDHP. EBRI expects slow but steady growth in the employer market.

Many in the new administration and the Republican-led Congress have been vocal supporters of enhancing HSA policies across all markets, including the individual market. A number of bills have been introduced with the intention of spurring greater use of HSAs. These include both the House and Senate bills to repeal and replace key elements of the Affordable Care Act. Some of the proposed provisions would increase the annual maximum HSA contribution, allow individuals to use HSA funds to cover over-the-counter medications, and reduce penalties for account holders who use HSA funds for non-medical purposes – from 20 percent to 10 percent. Indeed, last week, the Senate added another proposal, which would let individuals use HSA funds to pay for their HDHP premiums. Senate leaders note that both the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) have projected this provision would increase coverage.

Some young adults might not be able to fund accounts

I recently had the chance to revisit the topic of health insurance with my daughter, and I now have some real-world insight based on how this option has worked out for her. For one, she has already gone through her employer’s contribution. Even for someone who is relatively healthy, she does have a health condition requiring medication, physician visits, and tests. Second, despite a relatively well-paying job, she is not in a position to contribute to her HSA – and won’t be for a while.

The latter revelation is something that is not uncommon for people my daughter’s age, which is supported by our latest research on this topic. The Deloitte Center for Heath Solutions recently published a paper that examines health savings accounts in the individual market, with a focus on learning from the experiences of employees as well as Medicaid and Medicare beneficiaries.

Our study found that young adults – a group that is considered essential for healthy risk pools – would need to have considerable funds in an HSA to pay for the typical outpatient hospital visit. While outpatient visits are less common than emergency room visits, they can be far more expensive. A review of plan designs in several markets, and comparisons to the average cost of an outpatient hospital visit, revealed the costs consumers under age 30 could face with an HDHP.

In the five markets we examined, we concluded that a 27-year-old would need to have between $3,617 and $6,572 in an HSA to cover the cost of the average outpatient hospital visit. Meanwhile, the typical 25- to 34-year-old in the group market has an average account balance of $1,414.1 Even for the oldest group, one outpatient hospital visit could wipe out the account.

“Health savings accounts (HSAs) in the individual market: HSA plans and high-deductible health plans continue to see steady growth,” Deloitte Center for Health Solutions

EBRI’s own studies on HSAs generally have found that:

  • Most accounts are new. While HSAs have been available since 2004, 77 percent have been opened since 2013.
  • Many accounts (36 percent in 2016) have no contributions.
  • Account balances are trending up: the average was $2,536 in 2016.
  • Individual contributions are also trending up: the average was $1,987 in 2016, while employer contributions were flat, averaging $935.
  • Just four percent of account owners invested HSA dollars in 2016.

Can the individual market learn from employers and Medicaid?

The employer experience with HDHPs and HSA-compatible plans can provide many lessons for the individual market. Younger employees (like my daughter) generally contribute less to their HSAs than their older coworkers, and many healthier individuals find the combination of high deductible plan with accounts more attractive than do unhealthy individuals. Moreover, the arrangements are typically favored by high-income households over lower-income households, and HDHPs plans can reduce health care utilization and spending.

We are also beginning to learn from a few experiments with health accounts in Medicaid. Programs in Indiana and Michigan, for example, have shown that low-income consumers might become more price-sensitive and accountable for their own spending, but also could face barriers that are less common in the group market (e.g., absence of checking accounts or internet access can make it difficult to make payments or check balances).2

A takeaway from our paper and a point made at the EBRI conference that resonates with me is that an HDHP combined with an HSA can provide a financial incentive to shop for medical services, but employers have learned they need to invest in tools and education so that employees know how to use them. Although some employers might have figured out how to encourage people to invest in their HSA funds and use transparency tools to shop for care, there still are gaps in employees’ knowledge.

It can be far more challenging in the individual market where enrollees do not have an employer to help them. Health insurers and insurance exchanges might need to fill that role. These entities may need to consider enhancing tools and support to consumers as HDHPs and HSAs become more prevalent in the individual market.

Going back to the anecdote about my daughter, I think it is fair to say that high cost sharing – through deductibles or other benefit design – can put people at risk for significant out-of-pocket spending. If this means individuals are more apt to question the need for services and shop for lower prices, then that is positive. But sometimes people will have a hard time paying for necessary care. To be clear – this isn’t an issue stemming from HSAs, it comes from high-deductible products more broadly.

That said, I was struck at the EBRI conference with the idea that HSAs could really help people prepare for health care spending in retirement with tax advantages. Some of Congress’s proposed policy changes could make it easier for people to contribute and use the funds. Educating people – including my daughter once she gets ready to think about the long term – about the tax benefit of the contributions and spending (compared to a 401(k) or an individual retirement account), plus the value of investing the funds, is likely needed to help people use this vehicle to its potential.

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1 Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2015: Estimates from the EBRI HSA Database, Employee Benefit Research Institute, 2016
2 The Lewin Group, Indiana Healthy Indiana Plan 2.0: Interim Evaluation Report, July 6, 2016; State of Michigan Department of Health and Human Services, Michigan Adult Coverage Demonstration Section 1115 Annual Report, 2016


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In the News

Amended version of Senate bill adds funding for opioids, DSH payments; keeps some ACA taxes

Last week, Senate Republicans released an updated version of the Better Care Reconciliation Act of 2017 (BCRA), designed to repeal and replace key elements of the Affordable Care Act (ACA) (see the July 11, 2017 Health Care Current). While similar to earlier versions in changing the financing of care in the individual insurance market and Medicaid, the updated draft adds or changes some provisions. It would:

Provide additional funds to states:

  • Authorize an additional $70 billion for state-based insurance reforms, including stabilization funding for health plans covering high-risk individuals in qualified health plans (QHPs) on the exchanges. To qualify for the funding, the health plan would have to offer at least one gold- and one silver-level plan, and at least one benchmark plan. Insurers that met these requirements would also be permitted to sell non-QHPs outside of the exchanges.
  • Reserve 1 percent of the funds available under the State Stability and Innovation Program for states where premiums are 75 percent higher than the national average.
  • Authorize $45 billion for drug abuse prevention and treatment including pain and addiction research.

Other changes to provisions concerning the individual market:

  • Allow individuals to use HSAs to pay for premiums.
  • Allow anyone in the individual market to purchase a catastrophic plan, and allow individuals to receive tax credits for those plans. Catastrophic plans typically have lower premiums and higher deductibles than the metal-tiered plans, cover three primary care visits a year, and have federal protections that limit an individual’s out-of-pocket costs. Only individuals under the age of 30 are now permitted to purchase these plans.


  • Change the Disproportionate Share Hospital (DSH) calculation from per-Medicaid- enrollee-served to per-uninsured-patient-served in non-expansion states. Additionally, it would allow expansion states that discontinue expansion coverage prior to 2020 to receive DSH payments beginning the following month.
  • States could apply for a waiver to continue and/or improve home and community-based services for aged, blind, and disabled populations.
  • If a public health emergency is declared, state medical assistance expenditures up to $5 billion could be excluded from the per capita caps or block grant allocations.
  • Add an expanded block grant option to allow states to add their expansion populations under the block grant if they opt to do so.
  • Include spending for home and community-based services under per capita caps.

Retain some tax provisions:

  • Maintain the ACA’s net investment income tax, the Medicare Health Insurance tax on high-income individuals, and the remuneration tax on executive compensation for certain health insurance executives (see the June 29, 2017 Reg Pulse blog).

Medicare hospital fund to be depleted by 2029

On July 13, the Boards of Trustees for Medicare reported new projections for Medicare program solvency, estimating that the Hospital Insurance (HI) trust fund would remain solvent through 2029. This is one year later than it projected in 2016. Importantly, the Board says that cost growth in Medicare is not expected to exceed the target established by the ACA until 2021, which is the first year that the Independent Payment Advisory Board (IPAB) could be triggered (see the June 13, 2017 Health Care Current). This is a change from last year’s report, when the trustees predicted that IPAB would be triggered this year.

The reason for the longer solvency period and for the IPAB provisions not getting triggered is primarily slower growth in hospital inpatient spending. The report also shows projections for long-term gains in enrollment in Medicare Advantage, and shifts in the share of total spending from inpatient and physician services to hospital outpatient settings. In addition, the report shows a shift in Part D spending from the subsidized part of the benefit to the reinsurance part of the benefit, showing that more Medicare beneficiaries have much higher spending on prescription drugs.

GAO: Lower quality hospitals should not qualify for Medicare payment bonuses

Hospitals with low quality scores still received Medicare payment bonuses, according to a Government Accountability Office (GAO) report on the ACA’s hospital value-based purchasing (HVBP) program. The GAO found that hospitals with missing scores were more likely to receive Medicare payment bonuses than hospitals that had complete scores. For example, CMS gave hospitals with low quality scores, but high enough efficiency scores, bonuses because their total performance scores made them eligible. More safety net and small rural hospitals received bonuses compared to all hospitals despite having quality scores below the median.

The GAO’s assessment focused on HVBP’s impact on Medicare quality and efficiency among safety net, small rural, and small urban hospitals. Researchers used annual fiscal year (FY) 2013-2017 data on performance measures and payment adjustments for all hospitals participating in the program. Safety net hospitals, hospitals that serve a high proportion of low-income patients, scored lower on quality and were more likely to receive a penalty compared to all participating hospitals. By contrast, small rural and small urban hospitals – those with fewer than 100 patients – had higher scores compared to all hospitals and were more likely that others to receive a bonus.

Under the HVBP program, CMS adjusts Medicare payments based on a hospital’s performance on a designated set of quality and efficiency measures. Hospitals receive a bonus or penalty of less than 0.5 percent each year. The annual bonus or penalty has been less than $100,000 each year of the program. However, the percentage of hospitals receiving a bonus greater than 0.5 percent has increased from four percent in FY2013 to 29 percent in FY2017.

GAO recommends that CMS revise the methodology used to calculate total performance scores to prevent lower quality hospitals with missing quality scores from receiving Medicare payment bonuses.

The GAO report also found:

  • Clinical process scores were lower among safety net hospitals and higher for small urban hospitals than for all hospitals.
  • Small hospitals consistently had higher patient experience scores, while safety net hospitals had the lowest scores.
  • Health outcomes scores were generally lowest among small rural hospitals, except for FY2016. Additionally, safety net hospitals and small urban hospitals did not perform as well as other hospitals, except for FY2016.

(Source: GAO, “CMS should take steps to ensure lower quality hospitals do not qualify for bonuses,” June 2017)

Individual market is stabilizing even as some insurers pull out of market

A new report from the Kaiser Family Foundation, using data from the first quarter (Q1) of 2017, found some evidence that the individual market is stabilizing and health plans are regaining profitability. According to the report, despite unfavorable economic outcomes in 2014 and 2015, the individual market – both the public exchanges and private off-exchange health plans – showed signs of improving in 2016. Using the most recent data, the report determined this trend continued into Q1 of 2017. However, the report comes as many health plans are withdrawing from the individual exchanges. CMS projects 47 counties nationwide will have no participating health plans in plan year 2018.

The report found that both medical loss ratios (MLR) and health plan margins have improved since 2016. MLRs, or the amount a health plan pays out in claims versus how much is retained by the plan, reached unfavorable levels of 88 percent in Q1 of 2015 after rising steadily since 2011. MLRs began to decline in 2016, suggesting improved financial performance. This trend continued into Q1 of 2017, with MLRs reaching their lowest rate since 2011.

Gross margins, measured on a per-member-per-month (PMPM) basis, improved in early 2017. PMPM margins reached a high of almost $100, more than double the margins from previous years.

According to the report, premium increases and the slow growth of medical claims have helped to improve financial performance. While premiums increased 20 percent between 2016 and 2017, per person claims grew only five percent. The researchers hypothesize that premium increases were necessary and were an appropriate one-time market correction to adjust for a sicker-than-expected population.

(Source: Cynthia Cox and Larry Levitt, “Individual Insurance Market Performance in Early 2017,” Kaiser Family Foundation, July 2017; The Kaiser Family Foundation, “Individual Insurance Market Performance in Early 2017,” July 10, 2017)

House approves FDA user fees and allocates $2.8 billion of discretionary funding

Last week, the House of Representatives passed the Food and Drug Administration Reauthorization Act (FDARA), which reauthorizes the four user-fee programs that help fund the FDA and updates the regulatory process by which the FDA reviews and approves product applications. The bill includes $2.8 billion in discretionary funding and an additional $60 million to implement provisions from the 21st Century Cures Act.

The user-fee programs include the Prescription Drug User Fee Act (PDUFA) and its amendments governing fees for generic drugs (GDUFA), medical devices (MDUFA), and biosimilar products (BsUFA), which authorize the FDA to collect fees from the life sciences industry to fund the regulatory review of their products. The user fees account for an average of 60 percent of total FDA funding. The House-approved version of FDARA increases user fees by $400 million in 2018, with incremental increases in following years.

Although passage in the House signifies one hurdle the Act has gone through, it still must be approved by the Senate and signed by the president before the end of July to avoid potential layoffs of FDA staff and other interruptions. The programs are set to expire at the end of September.

House hearing covers how Congress can clarify off-label medical device use

On July 12, the House Subcommittee on Health held a hearing to discuss how medical products are often prescribed and administered for “off-label” uses, and how product manufacturers face limitations in communicating about such uses. Six witnesses provided testimony for the committee as it reviewed two proposed bills (HR 1073 and HR 2026), and examined ways Congress could clarify how drug and device companies can responsibly disseminate data and information that is not included in product labeling.

The committee also discussed the dissemination of the latest scientific and medical data related to the off-label use of such products in different populations and trials. Industry witnesses’ testimony discussed their views of potential implications of the proposed legislation in the complex environment of the FDA approval and availability of information. This included the benefits of sharing “comprehensive, scientifically valid data” while noting the necessity for “boundaries within which manufacturers may responsibly disseminate accurate, and up-to-date information.” The bipartisan 21st Century Cures Act charges the FDA with evaluating the expanded use of real-world evidence (RWE), including its potential to support the approval of new uses for previously approved drugs.

Related: The shift toward RWE has increased as life sciences companies search for opportunities to discover, optimize, and demonstrate value. RWE comes from secondary analyses of observational data from the health care system and, increasingly, patients themselves, as digital health and the Internet of Things become reality in many therapeutic areas. The industry-wide shift from volume- to value-based payment models – and the move toward more personalized health care – has fueled interest in using RWE to understand and demonstrate the value of pharmaceutical and medical device innovations outside of clinical settings. Deloitte’s 2017 real world evidence benchmark survey shows that life sciences companies are making some progress in using RWE, but still have opportunities to expand applications across the value chain, consider new channels to access real-world data, and improve their overall capabilities.

Breaking Boundaries

FDA releases plan to fund Innovation Account

On July 7, the FDA released its Work Plan and Proposed Funding Allocations of the FDA Innovation Account, the agency’s plan to spend the $500 million in new funding provided by the 21st Century Cures Act. The Cures Act, bipartisan legislation that became law in December 2016, allocates $6.3 billion to advance biomedical innovation by funding basic science research and allowing for innovation and flexibility for product regulation at the FDA. The funding is appropriated to FDA from FY 2017 to FY 2025.

The plan emphasizes, among other initiatives, the FDA’s work on:

  • Advancing new drug therapies and the development of a qualification process for drug development tools
  • Continued emphasis on patient-focused drug-development initiatives
  • Establishing a program to evaluate the use of RWE
  • Supporting medical-device innovation
  • Modernizing the review and designation of combination products

The agency submitted the plan to its Science Board this spring. The plan calls for the FDA to allocate $95.3 million – from fiscal 2018 to fiscal 2025 – to provisions in the Cures Act related to advancing new drug therapies. As part of these initiatives, the FDA will develop criteria needed to support qualification of drug-development tools, develop regulatory informatics platforms, and integrate new review processes, which the agency says is necessary in the near future to ensure it meets its obligations.

For its patient-focused drug development initiative, funding begins in fiscal 2018 with $2.3 million, which is expected to gradually increase to $4.2 million in fiscal 2025. The FDA will issue guidance to address issues, such as acceptable methodological approaches for collecting, measuring, and analyzing patient experience data. The agency will also issue reports on assessing the use of patient experience data in regulatory decision-making, and will release statements about how it uses patient experience data in the review of a drug or biologic marketing application.

FDA Commissioner Scott Gottlieb, M.D., notes in a July 7 FDA Voice blog that, as part of implementing provisions in the Cures Act, FDA has already taken steps to include use of computer modeling and simulation tools to support model-based drug development and to make clinical trials more efficient. As an example, he mentions that the FDA can model some aspects of the behavior of the placebo arm in clinical trials, and that the agency is collaborating with scientists to develop such natural history models in several different rare diseases that are more difficult to study due to the smaller patient population.

Initiatives to support medical-device innovation will largely be funded starting in fiscal year 2020. Under provisions that the Cures Act lays out for breakthrough devices, the Expedited Access Pathway program will grow at a rate as high as 20 percent per year over the next 10 years. To accommodate this growth, the FDA will also need to acquire information technology systems and issue guidance on “probable benefit” of humanitarian use devices. It also will need to train employees on the application of the “least burdensome” principle in device review, and implement a surveillance system for exempted medical software products or functions.

Analysis: As described in the Deloitte Center for Health Solutions’ recent paper, 21st Century Act: The future of product innovation and approval, the Cures Act creates an opportunity for the FDA to apply recent advances in technology and analytics, and scientific and evidentiary models, to continue evolving regulatory programs. In many ways, the drug, device, and diagnostic development and approval process of yesterday is over. Life sciences companies (biopharma, medical device, and diagnostics companies) may risk being out of date and competitively disadvantaged if they are not pursuing the newer breakthrough, priority, or accelerated pathways included in the Cures Act, and in some of the initiatives FDA has developed in the past several years. As the industry strives to meet the evolving needs of stakeholders – patients, providers, and health plans – this regulatory flexibility will likely be imperative to drive both regulatory approval and market access.

(Sources: FDA, “Work Plan and Proposed Funding Allocations of FDA Innovation Account,” June 6, 2017; Scott Gottlieb, “How FDA Plans to Help Consumers Capitalize on Advances in Science,” FDA Voice, July 7, 2017)

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